Markets

China Slowdown Will Plague Markets For Years

January 31, 2016
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China Slowdown Will Plague Markets For Years

What a start to the year. CJF’s contrarian prediction of 1,860 on the S&P came to be on January 20th. Subsequently, the market rallied strongly on the hint of more quantitative easing out of the ECB, and the adoption of negative interest rates by the Bank of Japan. Any doubts that 2016 will be a volatile, and difficult year, should now be erased. After a tumultuous January for investing, a period when seasonality and investment inflows are supposed to support markets, CJF is stepping back to assess big picture dynamics for the global economy and the overall investment environment. At risk of being overly obvious: Something is not quite right with the global economy In the seventh year of recovery since the financial crisis, Brazil is in recession, Russia...

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2016

January 7, 2016
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2016

“I would say happy new year but it’s not happy; it’s exactly the same as last year except colder.” -Robert Clark I find the quote fitting for financial markets, and CJF prognostications, after a very tough 2015, and an inauspicious start to 2016, with a week-one tailspin around the globe. The setup for 2016 isn’t pretty, and investors should brace for a potential sharp pullback in markets, and heightened volatility through the year. Decisive 2016 themes: 1) valuation (high) 2) deflation (pressures global earnings) 3) liquidity (tug-a-war between Fed and “other”) The S&P 500 valuation swelled from 12x forward earnings in 2011, to 17x in 2015. While the market multiple is now somewhat off its high, it remains in the 16x vicinity. High valuation raises the bar for economic/earnings...

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Policy Driven Markets are Treacherous

December 10, 2015
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Policy Driven Markets are Treacherous

Volatility in the stock market is rising, intraday swings more violent, and high-to-low ranges increasing. The lurching action of the market is not driven by fundamentals, it’s difficult to profit from, and disconcerting. There isn’t a single item to pinpoint with respect to market angst, rather, a combination of factors, leading to manic sentiment changes. The sweeping issue of late-2015 is the extent to which global financial markets remain policy driven. During the financial crisis and subsequent few years, the degree of governmental and regulatory involvement in the economy and markets was prudent. Letting a crisis flare served no one. However, it’s worrisome that markets are still sooooo policy dependent 7-years into a recovery. One shudders to think what will happen if the economy really slows. China markets sit...

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Black Friday Retail Dud; Online Share Shift Accelerates

November 28, 2015
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Black Friday Retail Dud; Online Share Shift Accelerates

Bah humbug. Black Friday jumped the shark sometime around the turn of the century. Nonetheless, a disproportionate amount of retail and media focus continue to emphasize Black Friday’s importance as an event. While declining over several years, this year got markedly worse, to the point where media reports were forced to highlight the “normality” of shopping on Black Friday and the notable empty parking lots. This year, the Grinch brought store based retail sales over to online. Sources of information are disjointed but echo the same themes enough to draw some early conclusions: WSJ: “Early Sales Thin Black Friday Rush “Driving up to a nearly empty parking lot at a Wal-Mart in Houston Friday morning, Dora Rodriquez, 39, stopped her silver hatchback in surprise and called out her window...

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Qui n’avance pas, recule

November 16, 2015
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Qui n’avance pas, recule

We all eat at restaurants, go to stadiums, and walk down the street. The tragically successful terrorist attacks in Paris highlight the vulnerability of the human condition at any instant. While this has always been the case, and will continue to be so, civilization, and human progress, over past centuries and decades, reduces the chance of random death from a vulgar, inhumane cause. Radical Islamic terrorism is so deplorable because the aim is to destroy, to undo, to move backwards in time, and to return to a harsher world. The impossibility of the ultimate success of the radical Islamic movement is matched with the fervor of the very small percentage of the world population that supports this movement. To create the scale necessary to carry out such large scale...

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Midsummer Issues Persist; Divergent Global Central Bank Actions Create Challenges

November 10, 2015
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Midsummer Issues Persist; Divergent Global Central Bank Actions Create Challenges

The market moves fast. Thankfully, in the rest of the world, trends of all kinds, generally move at a measured pace. The market overreacts to events and day-to-day happenings based on crowd think and behavioral issues. A change in trend will often start with a subtle data point or indicator, which in hindsight, ignites a big, and sustained move in the market. Now is not one of those times. Late summer fears of China slowdown and EM collapse look to have been overblown, and the severity of the selloff too harsh. But the rally of the past two months also contains elements of overreaction; the underlying drivers and risks from the summer aren’t resolved. The world is fundamentally caught in a new dynamic. Credit expansion reached limits in every...

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On Sentiment; How the Market Mini-Crashed and Exploded Right Back

November 4, 2015
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On Sentiment; How the Market Mini-Crashed and Exploded Right Back

The stock market is on fire. As negative, dour, downbeat, and gloomy was August, the market this fall (early fall), is contrastingly, positive, nonchalant, optimistic, and even euphoric. So it goes; a fast 11% sell off over 6 trading days, on little more than poor sentiment, and a 3% Chinese currency devaluation, followed by an incredible global recovery on dramatic global central bank stimulus and, well, things not being quite so bad in China (for now). In retrospect, it’s always easy. The economic machine works as a process (using Ray Dalio’s terms), and short of a deep freeze of liquidity, economic activity doesn’t shut down over night. The global economy isn’t ready to slow dramatically; the US is still too strong, and global central banks still too eager to...

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Amazon and Wal-Mart; Atypical Market Rally Driven by Disintermediation and Secular Trends

October 24, 2015
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Amazon and Wal-Mart; Atypical Market Rally Driven by Disintermediation and Secular Trends

Wal-Mart recently hosted an Analyst Day to update Wall Street on current operating trends and strategy. The amount of investment needed to modernize the store base, and improve the overall customer offering is staggering. Wal-Mart will experience a second consecutive year of earnings decline in 2016. The stock took the update poorly, falling over 12% from last week’s price of $67 to $58 on Friday. The decline slashed $27b in market capitalization. Along with Wal-Mart, the retail sector got pounded, despite a rampaging market and stunning moves within large-cap tech. While the market isn’t at new highs (yet), the August sell-off is now undone, and the market trades solidly within the range of the previous 7-months (2,050-2,130). What’s going on? The current rally is atypical because it’s driven by...

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5 Investment Patterns That Don’t Make Sense

October 14, 2015
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5 Investment Patterns That Don’t Make Sense

2015 is shaping up to be a challenging year for investments. The market swoon in mid-August caught most off-guard, and the subsequent violent recovery arrived right after several prominent investors turned bearish, or at least hedged. Markets don’t need to make any sense, and at times, understanding “why” the market is getting crushed, or exploding, is a futile exercise; it may lead to a grounded feeling, but ultimately, is not too helpful in predicting the next move. Nonetheless, since mid-August, several relationships/patterns emerged that are particularly nonsensical. A short list: 1) A-share returns matter for global stock markets The stock market in China, the world’s second largest economy, is a big mess of a structure. Top Chinese companies are listed in three separate exchanges/geographies, each open to a different...

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Dovish Fed Minutes Ramp Market; Valuing the Yellen Put

October 10, 2015
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Dovish Fed Minutes Ramp Market; Valuing the Yellen Put

The September 16-17th FOMC minutes were released Thursday afternoon, continuing the market’s Beast Mode reaction to Fed dovishness. The S&P 500 completed the best week of the year, barely down-ticking from 1,893 to 2,015. The market rallied 7% from the lows after the September Employment report to the highs yesterday. The 122 handle rally takes the market multiple up one turn (from 15x to 16x multiple). Despite the euphoria of a quick fix, there are a number of reasons for caution after scrutiny of the Fed’s minutes. Yes, the Fed minutes were dovish. Full stop. The Fed awaits more data on improving labor markets despite a 5.1% unemployment rate, and inflation is expected to remain below 2% for some time. All the voting members, other than Lacker, voted against a hike....

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Utilities Utilities Utilities; sound investment for a slower growth, low rate world

October 6, 2015
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Utilities Utilities Utilities; sound investment for a slower growth, low rate world

What a rally! In two sessions, the S&P 500 rallied 5%, almost 100 handles from the Friday low. The ex-post “cause” of the rally seems to be the punk September Employment Report, which boxes the Fed into a corner. Yellen’s inertia, and dovishness, during the September press conference, coupled with the subsequent soft employment data, led to an immediate feeling of: “oh my, now they can’t hike“. The surprisingly low payroll data initially got sold, but upon further reflection, the soft report created certainty, that the Fed is out of the equation, and zero interest rates will remain in place for as far as the eye can see. Markets prefer certainty, and thus the 5% explosion higher. It’s really that simple a 5% move. Using 2016 earnings estimates of $125, the...

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Global Growth Scare + High Valuations = Bear Market Dynamics

September 29, 2015
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Global Growth Scare + High Valuations = Bear Market Dynamics

It’s been a difficult market since the dog days of summer. After 10-months of exceptionally low volatility, a fierce downdraft set in during mid-August. Lower stock prices, and volatility, will persist, simply because the conditions to go right back to the old dynamic aren’t in place. There isn’t enough global growth to support stock prices at high valuations. Full stop. Investors got complacent, extrapolating higher trends in stocks price as growth around the world slowed; a bad combination. For perspective, the market (S&P 500) got close to 18x forward (1-year ahead) earnings at the high of 2,131. An 18x multiple represents an incredible move from the 12x multiple the market achieved during most of 2011. QE set in motion exceptionally low interest rates and a stock-market re-rating. The ability...

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